Long Run Incremental Cost (LRIC) Interconnection Rates

• Jurisdiction: Barbados
• Judgment Date: 27 March 2015
• Docket Number: Document No.: FTC/URD/DECLRIC 2015-01
• Court: Fair Trading Commission (Barbados)

Long Run Incremental Cost (LRIC) Interconnection Rates

Document No.: FTC/URD/DECLRIC 2015-01

FAIR TRADING COMMISSION

DECISION

TABLE OF CONTENTS

EXECUTIVE SUMMARY	5
1. Introduction	7
2. Background	8
3. Legislative Framework	11
4. Methodology	13
5. Key Issues Considered During The Process	14
Weighted Average Cost of Capital (WACC)	14
Fixed Access Network Elements	15
Network Sharing	15
Technology Assumptions	15
Owned vs Leased Mobile Cell Sites	16
Mark-up Methodology	16
Transparency and Confidentiality	17
Sensitivity Analysis	18
6. Model Results, Determination & Implementation	19
Model Results and Validation	19
Implementation of LRIC Based Rates	19
Interconnection Rate Structure	19
Interconnection Rate Level	20
Transition to New LRIC-Based Interconnection	21
Other Interconnection Services	23
Application of LRIC Based Rates to the RIO 2010	24
7. Determination	25
Interconnection Rate Structure	25
Interconnection Rate Level	25
Transition to New Interconnection Rates	26
Other Interconnection Services	27
Appendices	28
Appendix 1: Definitions	29
Appendix 2: Sensitivity Analysis on Final Modelling Results	32
Appendix 3: Chronology of the Process	34

Executive Summary

1 The Fair Trading Commission (the Commission) required Cable & Wireless (Barbados) Limited (C&W) to adopt a forward-looking, Long Run Incremental Cost (LRIC) methodology in order to determine interconnection rates. This necessitated the development of fixed and mobile LRIC models for deriving the costs that an efficient operator would incur in providing interconnection services in a competitive market. The resulting costs for fixed and mobile, termination and transit services were used to inform the rates that would be applied for interconnection purposes.

2 The Commission having analysed the results of the models therefore determined that the interconnection rates for Fixed Transit, Fixed Termination, Mobile Transit and Mobile Termination interconnection services in $BDS/min are as follows:

• • Fixed Transit — $0.010;

• • Fixed Termination — $0.011;

• • Mobile Transit — $0.011;

• • Mobile Termination — $0.055

3 The rate structure for interconnection services will be based on a single per minute tariff (instead of the current two-part tariff) and will replace relevant rates in the Consolidated Reference Interconnection Offer 2010 (RIO 2010).

4 The Fixed Transit Service rate will replace the PSTN 1 Transit Service Charge in the RIO 2010, as well as the Transit Part of the Domestic Fixed to Mobile Service Charges. The Fixed Termination Service rate will replace the charges for the PSTN Terminating Access Service in the RIO 2010. The Mobile Transit Service rate did not exist in the RIO 2010 but it is a rate in the Variation Agreement 2 between Digicel Barbados Limited and C&W that was approved by the Commission on December 9 ^th, 2014. This new rate will replace the PLMN 3 Transit Service rate in the Variation Agreement. The Mobile Termination Service rate will

replace the Mobile Termination part of the PLMN to PLMN Terminating Access Service of the RIO 2010

5 It should be noted that these LRIC-based interconnection rates are significantly lower than the interconnection rates in C&W's existing RIO 2010 and the implementation approach to be adopted will be effected using a glide path, which will entail a larger change being done in the initial phase. There will be an initial 60% decrease in the difference effective May 1, 2015 and the remaining 40% on April 1, 2016.

6 The rates for other interconnection services currently included in the RIO 2010 Tariff Schedule, namely National Directory Enquiry (DQ) services, Emergency Services and Incoming International Services, will remain unchanged.

1. Introduction

7 This document sets out the Decision of the Fair Trading Commission (Commission) on the determination of the interconnection rates which were determined by modelling the forward looking long run incremental costs (LRIC) of an efficient operator and using Cable & Wireless (Barbados) Limited (C&W's) fixed and mobile telecommunications networks. The Commission retained the expertise of consultants to support this process.

8 The entire process was accomplished in three phases:-

9 Phase 1 established model guidelines and specifications for model building. Following public consultation on the draft LRIC Guidelines, the Commission issued a decision entitled “LRIC Guidelines for Cable & Wireless (Barbados) Limited FTC/DEC2011”. This decision formed the basis for C&W to commence drafting specifications for building the LRIC models. In July 2012 C&W submitted the required draft specifications document for Barbados Fixed and Mobile LRIC models. A period of stakeholder consultation ensued and having received input from interested parties as it related to the specifications, the Commission approved the draft specifications for the Barbados fixed and mobile models. C&W was then given the approval to proceed with building the LRIC models.

10 Phase 2 involved the construction of the LRIC models and evaluation of the model results which established the LRIC costs. The Commission in association with its consultants reviewed all submissions from stakeholders before issuing directives to C&W relating to the finalisation of the LRIC models.

11 Phase 3 determined the LRIC interconnection rates and implementation approach to be adopted in effecting the LRIC rates.

2. Background

12 The process for the development of LRIC based rates was initially prompted by the terms set out in the Commission's Decision (FTC/03/03) on interconnection pricing which required the development of LRIC models for deriving interconnection costs for fixed and mobile call termination and transit services. The Commission in a later decision on C&W's RIO 2010 dated February 22, 2010, determined that C&W should undertake an LRIC study to determine interconnection costs and tariffs.

13 The provision of interconnection facilities on fair and efficient terms is widely recognised as an essential requirement for the creation of a competitive telecommunications market. This is because operators in a competitive market need to terminate calls on other operators' networks and similarly to receive calls originating on other operators' networks. Furthermore in a small market it makes sense economically, especially as competition develops, for competing operators to use each other's core networks for transit purposes rather than have multiple points of interconnection. Often this will be the most efficient way that a new entrant can provide some services. Interconnection charges can account for a significant share of an operator's total costs and as such, it is important that interconnection rates be derived from appropriate costs in order to provide a proper economic basis on which operators can make decisions.

14 LRIC models are used to estimate the cost that an efficient operator would incur in providing interconnection services in a competitive market. Some of the benefits of having interconnection rates based on LRIC are that they:

• (a) encourage efficient competition in the wholesale market which leads to competition in the retail market;

• (b) promote efficient forward-looking investment decisions;

• (c) facilitate effective means of interconnection; and

• (d) are non-discriminatory and non-preferential.

15 There are several approaches 4 based on LRIC methodology that were considered by the Commission in undertaking cost studies for the determination of interconnection pricing. These approaches include pure LRIC, total service LRIC (TSLRIC), total element LRIC (TELRIC) and long run average incremental cost (LRAIC). The design of these models can be top-down, bottom up or a hybrid. A top-down design starts with the operator's reported costs and removes the non-incremental costs. A bottom-up design estimates the costs that a hypothetical network operator would incur in order to meet a given level of demand based on a series of engineering rules. The hybrid design combines the bottom-up design with the top-down to strike a balance between accuracy and reflecting efficient forward looking cost.

16 The Commission determined Total Service Long Run Incremental Cost (TSLRIC) as the modelling approach to be adopted as opposed to other forward looking methodologies for determining interconnection rates, because it provides for the inclusion of a share of joint and common costs from all services. This approach encourages competition in telecommunications markets by promoting efficient entry and exit in relevant downstream markets; encourages economically efficient investment in infrastructure and provides the appropriate incentives for further investment in the most efficient technology available. The Commission also decided in the approved LRIC Guidelines to adopt a hybrid approach to modelling costs by using a bottom-up approach to derive network capital cost estimates and a top-down approach to derive operating costs.

17 Digicel, however, was dissatisfied with the...